Analysis: Ordinary people reel from inflation; economist warns it will lower economic growth

By Getahun Tsegaye @GetahunTsegay12 & Mahlet Fasil @MahletFasil

Addis Abeba, June 23/2021 – A recent report by the Central Statistics Agency (CSA) indicates that the  rate of inflation in Ethiopia increased by 19.7% in May 2021 compared to the same month last year. While the overall inflation rate surged by 19.9 percent the report indicated.

According to the report, food inflation accounts for the biggest inflation rate standing at 22.6%, while non-food inflation rose by 16.5% as of  May 2021. The CSA reported that the 12 months moving average inflation rate suggests a longer-term high inflationary projection in the country.

“Cereal prices continued to increase in the current month which has a great contribution to the rise in food inflation. In addition, the continued increase in the prices of edible oil, meat (showed fast price increase), butter, spices and coffee during the current month has contributed to an increase in the rate of inflation,” the report states.

CSA reported that the inflation for non-food items rose by 14.8% compared to the same period last year. Price increase in Alcohol and Tobacco, Stimulants (Chat), Clothing and Footwear, Housing Repair and Maintenance (Cement and Corrugated Iron sheets), Energy (Firewood and Charcoal), Medical care, Transport (fuel) and Jewelry (Gold) were the causes for such spike in inflation.

According to the data, at the country level, the month-on-month general CPI (Consumer Price Index) for the month of May 2021 has shown an increase of 2.2% as compared to the preceding month. 

“We don’t have another country. I don’t know when the government will take action.”

Selamawit Girma, a resident of Addis Abeba

To understand the toll of such market movement, Addis Standard spoke to some  residents of Addis Abeba. Like Mastewal Biru who said, “We don’t see an increase in our monthly salaries but the cost of living in the capital city is increasing day-to- day,” he continued explaining the toll it took on his way of life, “Now I am in the middle of living and not living. The government does not control it. The merchants do what they want.”

When asked on what items the price has increased, Mastewal replied, “Everything is more pricey but it is hard to tell how bad the price of teff, oil and medicine has gone.” He exclaimed, “Do you believe or not there is an increase of 2 birr per egg!”

Another resident of Addis Abeba who deals with continued inflation is Selamawit Girma, a mother of three with a monthly salary of 4000 birr. Selamawit described to Addis standard  how the increasing cost of living became a ‘nightmare’. “I am very scared of the current cost.  I am afraid of being on the streets with my children. Prices are increasing in house rent, transport, foods and non-food items make things out of control for which the government seems to be doing very little about.” She went on expressing her disappointment by saying, “We don’t have another country. I don’t know when the government will take action.”

But inflation seems to be affecting more than ordinary residents. Mesfin Haile is a retail shop owner in Addis Abeba who told Addis Standard, “There has been an increase of price in each item that we bring from the whole sale which obliged us to increase our retail price on the customers,” he continued expressing despair at the situation, “I feel bad but I can’t do anything as the price of every item increases daily.” 

An economist opinion 

Abis Getachew is an independent economist and researcher who has done research about the inflation in Ethiopia. While answering questions about the driving factors that bring change in inflation right now, he explained that the context of inflation in Ethiopia is linked with many factors. According to him, most of the consumer goods are imported which demand a lot of forex but he argued even goods that are produced in Ethiopia,m are affected by non-existent and ineffective chains of distribution.

“Corporates who have bargaining power relatively benefit from it while employees, retirees, savers, banks, and government are the losers.”

Abis Getachew

Abis went on saying, “ When we compare the national budget allocation of last year with this year, in terms of dollars, last year’s budget was way higher than this year. It indicates that our purchasing power is decreasing from time to time.” 

When asked about the winners and losers in the context of continued  inflation. Abis said, “Corporates who have bargaining power relatively benefit from it while employees, retirees, savers, banks, and government are the losers.” He expanded by focusing on points. He explained, “If prices rise, the value of money falls and the real value of savings declines which shows that savers lose from inflation.”

Abis believes that the working class is most affected by inflation. He said, “Inflation highly affects workers who are stuck on fixed-wages contracts. Suppose that workers have a wage freeze and then inflation is at 3%. It means at the end of the year their wages purchase 3% less than at the start of the year.” 

According to Abis analysis, “Borrowers, businesses with high debt, and landowners/owners of physical assets benefit from inflation.” He explained by adding, “While savers’ value declines in hyperinflation periods, physical assets tend to maintain their value. In such a period, physical assets such as gold and silver are highly demanded and don’t lose their value as paper money/birr.”

On the effect of global market movement on Ethiopia’s inflation, he said, “Inflation has been globalized and the situation of the global economy has a heavy impact on the local economy but the most significant impact, in the context of current Ethiopia’s inflation, comes from the huge imbalance between demand and supply.” He explained further that there are shortages of supplies in many aspects, especially in people’s daily consumption of goods though the demand is not that much exaggerated.  

Abis believes that the economic elites and the government seem to have done little about it.  He, therefore, suggested the government and concerned bodies come up with methods to manage inflation before it is too late and should pay due attention on how to minimize or regulate the rate of inflation in the country. 

If inflation is high and variable, Abis believes, it will create an atmosphere of uncertainty for both consumers, banks and companies which will result in a reluctance to invest and this can lead to lower economic growth. AS